Income inequality was stable during the recession

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While income inequality has been rising in many OECD countries, Ireland’s experience has been quite different. Overall income inequality in Ireland has been remarkably stable, although the deep and prolonged recession of recent years has led to substantial falls in household income across the board. New research from the ESRI helps to explain this result.

Analysis using SWITCH, the ESRI tax-benefit model, finds that the Irish tax and welfare systems have played a key role in ensuring that  increased inequality in earnings does not lead to increased inequality in household disposable income. Progressive tax/transfer systems provide some “automatic stabilisation” in the face of increased inequality. Welfare payments help to cushion the blow of unemployment, and if inequality in earnings increases, and a progressive tax system lessens the impact of increased earnings inequality on take-home pay. It is these automatic effects which have proved most important in keeping income inequality in Ireland stable. Over the 2008 to 2013 period, policy changes have also made a small contribution to the reduction in overall income inequality, as measured by the Gini coefficient. More detailed analysis, including the impact of changes to welfare benefits, direct taxes and public sector pay implemented over the crisis, finds that both top and bottom income groups were somewhat harder hit by these austerity measures than the middle.

Speaking about the findings Professor Tim Callan said “Families at all income levels and of all types have seen income losses during the recession years. Our analysis of CSO data helps to identify how those changes in individual incomes fit together into a pattern of broad stability in income inequality. The role played by the pre-existing progressive tax and welfare system has been critical in helping Ireland to avoid the rise in income inequality seen in many other countries”.

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